Tuesday, June 24, 2014

Here is an interesting article in the New York Times about bondholders ('vulture funds') obstructing a reasonable restructuring of Argentina's debt.

The Debt Vultures' Fell Swoop

By MARK WEISBROT

JUNE 22, 2014

WASHINGTON — Last week, the United States Supreme Court
decided not to review a ruling in the Second Circuit Court of Appeals
whose effect is that Argentina must pay “holdout” creditors who refused
to participate in debt restructuring agreements that Argentina reached
with the majority of bondholders following the 2001 default on its
sovereign debt. Argentina’s lawyers warned that the court’s decision
created “a serious and imminent risk” that the country would again be
forced to default. But the ruling also has profound and disturbing
implications for the functioning of the international financial system,
and even the United States would most likely be adversely affected.

Parties as diverse as the International Monetary Fund and leading religious organizations wanted the Supreme Court to overturn the decision, and briefs supporting this position were filed by the governments of France, Brazil and Mexico, as well as by the Nobel Prize-winning
economist Joseph E. Stiglitz. The I.M.F. — which has had mostly sour
relations with Argentina since its involvement in that country’s
1998-2002 recession — was also planning to file a brief on Argentina’s
side to the Supreme Court, but was blocked by the American government
from doing so. This action may have influenced the court’s decision not
to hear the case.

Argentina
defaulted on its international debt at the end of 2001, following a
deep recession. After years of negotiations, the government reached a
restructuring agreement with its private creditors, in which the
bondholders accepted a loss of about two-thirds of the value of their
bonds. In 2005, 76 percent of the creditors had signed on; by the end of
2010, more than 90 percent had. Argentina has made all of its payments on the new, restructured bonds, on time.

The
complication was over a group of “holdout” bondholders who did not
agree to the restructuring. The plaintiffs in the New York case are
widely known as “vulture funds,” because they bought the bonds after the
default at a fraction of their value, hoping to use court rulings like this one to force payment at the bonds’ original face value.

The
appellate court ruled that if Argentina was paying the holders of
restructured bonds, it must also pay the holdout or vulture fund
creditors in full — and its decision implies that the punishment for an
attempted default could be never-ending. This raises the question of how
many decades a people should be forced to suffer for the mistakes or
transgressions of earlier leaders — whether elected or, as is often the
case, unelected. (Much of the Argentine debt, in fact, was incurred by a
dictatorship.)

Another
key implication of the ruling is that governments that are bankrupt
would now find it difficult or impossible to negotiate a settlement with
their creditors. Who will take a haircut on their bonds if they can
refuse the terms and sue for the full value?

In
the United States, and most other countries, there are bankruptcy laws
designed to allow for companies and individuals facing unpayable debt to
make a new start. There is no such legal mechanism for countries, so
these restructuring agreements are an important way of resolving
problems of unpayable sovereign debt.

The
court’s decision would make it difficult to issue the new bonds needed
for restructuring, as well as further debt in the future. Just one
holdout bondholder or vulture fund creditor could torpedo the process.

In addition, Argentina’s default and devaluation in 2001-2 is widely regarded as a success.
The country’s economy shrank for just three months after the default,
and then began a rapid-growth recovery. By the end of 2011, Argentina
had achieved a record rate of employment, reduced poverty by nearly 70 percent and allowed for a tripling of social spending in real terms.

A
decade after the devaluation, the Argentine economy has run into
trouble — partly because the vulture funds have prevented it from
borrowing on international markets — but there is no doubt that
Argentines are vastly better off for the path that was taken. For
comparison, look at Greece: After six years of austerity-driven
recession, which included a 40 percent cut in health care spending, the
unemployment rate stands at 26.8 percent (and more than double that rate for youth) and the net public debt has grown to 169 percent of the country’s gross domestic product.

Most experts agree
that the appellate court ruling would have a destabilizing effect on
international financial markets. There is economic justice to consider,
too. Argentine bondholders were paid high interest rates on their bonds
because there was risk. Capitalism is not supposed to be a “heads I win,
tails you lose” bet — but the Second Circuit Court’s decision would
make it that way for sovereign debt bondholders.

Argentina
may find a way around the court’s decision, by issuing new bonds and
making payments that are outside of the court’s jurisdiction. But this
ruling in favor of the vulture funds will do continuing damage to
ordinary people around the world that will show up in future debt
crises.

Russell Brand told the
marchers there will be a 'peaceful, effortless, joyful revolution'
against austerity in the UK. Photograph: Rex Features

Tens of thousands of people marched through central London on Saturday afternoon in protest at austerity
measures introduced by the coalition government. The demonstrators
gathered before the Houses of Parliament, where they were addressed by
speakers, including comedians Russell Brand and Mark Steel.
An estimated 50,000 people marched from the BBC's New Broadcasting House in central London to Westminster.
"The
people of this building [the House of Commons] generally speaking do
not represent us, they represent their friends in big business. It's
time for us to take back our power," said Brand.
"This will be a peaceful, effortless, joyful revolution and I'm very grateful to be involved in the People's Assembly."
"Power
isn't there, it is here, within us," he added. "The revolution that's
required isn't a revolution of radical ideas, but the implementation of
ideas we already have."
A spokesman for the People's
Assembly, which organised the march, said the turnout was "testament to
the level of anger there is at the moment".
He said that
Saturday's action was "just the start", with a second march planned for
October in conjunction with the Trades Union Congress, as well as strike
action expected next month.
People's Assembly spokesman Clare
Solomon said: "It is essential for the welfare of millions of people
that we stop austerity and halt this coalition government dead in its
tracks before it does lasting damage to people's lives and our public
services."
Sam Fairburn, the group's national secretary, added:
"Cuts are killing people and destroying cherished public services which
have served generations." (...)

About Me

As a kid I liked numbers and the sound of strings. I considered studying engineering but chose social sciences because of my interest in people. I combine a theoretical interest with a practical, social approach which brought me to the sphere of policy research. I am interested in reducing the disparity between poor and rich, between the powerful and the less powerful.
In 1973 and 1982 I lived in Latin America. In the mid-1980s, I was able to create an international forum to discuss the functioning of the international monetary system and the debt crisis, the Forum on Debt and Development (FONDAD). I established it with the view that the debt crisis of the 1980s was a symptom of a malfunctioning, flawed global monetary and financial system.
I was one of the driving forces behind the creation of the European Network on Debt and Development that was established at the end of the 1980s to help put pressure on European policymakers.
In 1990, before the beginning of the Gulf War, I cofounded the Golfgroep, a discussion group about international politics comprising journalists, scientists, politicians and activists that meets regularly.
The website of FONDAD is www.fondad.org